Increasing Ijara's popularity

It seems we completed our detailed discussion on PCFC Musharaka Sukuk in time.

This is because I would like to draw readers' attention to the $1 billion syndicated Ijara facility for the Department of Civil Aviation (DCA).

As you are aware, DCA has embarked upon a grand capacity expansion plan for its Dubai International Airport operations. The second phase of the plan comprising of the new terminal was started in 2002 and is scheduled for completion by the first quarter of 2007.

Once completed, the new facility will have cost a whopping Dh16 billion, will be able to handle over 70 million passengers a year, a giant leap forward from the current capacity of about 25 million.

This is not the first time that the DCA has opted for Islamic route for the purpose of funding this project. I am sure the readers are aware of the DCA Sukuk launched in October 2004 for an initial subscription of $750 Million (Dh2.7 Billion). The Sukuk, having green shoe option, was enhanced to US$ 1 Billion (Dh3.6 Billion) owing to high investor demand.

A green shoe option is actually a choice granted by the country's regulatory authorities for an initial public offering or a capital market issue such as Sukuk or bonds.

Additional shares

The option allows the party launching the issue to be able to underwrite or sell an additional amount of shares or Sukuk over an above the required amount if public demand for the same exceeds the issue amount. It is called green shoe option since Green Shoe Company in the US was the first one to launch an IPO with such option.

Whilst the Sukuk issue in 2004 was underwritten by a six-member group of banks acting as joint lead managers viz. Dubai Islamic Bank, Citigroup, Gulf International Bank, HSBC, Kuwait Finance House and Standard Chartered Bank, the present syndicated facility has been fully underwritten by Dubai Islamic Bank, Standard Chartered Bank, ABN Amro Bank, Deutsche Bank, WestLB, Societe Generale, Development Bank of Singapore (DBS), Depfa Bank and DZ Bank the last three of them having participated for the first time in any Islamic financing transaction.

What is Ijara? How does it work and how it is different from a conventional banking transaction?

Literal meaning of Ijara is to acquire something on rent.

Different contract

Let us try to understand it by way of an example. If Ahmad employs Badar for his labour services and pays him a wage, Ahmad will be called Mustajir or employer and Badar Aajir or employee whereas the transaction will be termed Ijara or hiring and the wage 'Ujrah'.

Now, apply these terms to an asset, for example a car. If Ahmad hires a car from Badar, Badar will be Aajir i.e. the owner of the car providing the renting service, Ahmad will be Mustajir who is using the hired service, the amount paid by Mustajir will be Ujrah or the rent and the whole transaction will be called Ijara.

Ijara is classified under Sharia as a sale contract whereby the provider of the Ijara service (or Aajir) is seller and the one acquiring it i.e. Mustajir is the buyer and the subject matter of sale is the usufruct or the right to benefit from the asset for a certain period of time defined in the Ijara contract.

Ijara is different from the other sale contracts in Sharia in that whilst the usufruct in Ijara changes hand from the seller to the buyer, the title to the asset continues to remain with the owner.

In the other sale contracts viz. Bai Muajjal, Murabaha, Istisna, Salam, etc., the title and usufruct to the asset (or goods) both get passed to the buyer upon executing the sale contract.

- The author is Vice-President and Head, Sharia Structuring, Documentation and Product Development of Dubai Islamic Bank.